[ U P D AT E ]
Financial
industry will
need to find
$100bn of
unrecognised
assets to meet
collateral
requirements
A new study found the two-way
initial margin rules for non-cleared
derivatives will also result in a
collateral shortfall of $60 billion alone.
B
anks, custodians and buy-side firms
will have to find almost $100 billion
of unrecognised assets to support a
more demanding and complex collateral
management ecosystem, according to a
14
Global Custodian
30th anniversary 2019
new study.
A paper by consultancy Capco estimated
that $97 billion in previously untapped
assets will be required to meet regulatory
requirements from EMIR and Dodd Frank.
It also found that the onset of the two-
way initial margin rules for non-cleared
derivatives will result in a collateral
shortfall of $60 billion alone.
Other collateral requirements include
the initial margin needed for cleared
trades, pre-funded variation margin,
segregation requirements, default fund
contributions, and tighter collateral
eligibility.
“We have already seen a big spike in
collateral requirements in recent years,
forcing firms to seek out new sources of
high-quality liquid assets within their
inventories and via external channels,”
said James Arnett, partner at Capco.
“A range of factors mean that the
supply of eligible collateral is continuing
to tighten and as a result borrowing costs
are still trending upwards. So while firms
still need to focus on efficiencies and
optimisation, they will also need to tap
previously neglected or unrecognised
pools of collateral.”
In order to remain compliant, the
paper stated firms will have to prioritise
a number of focus areas, especially
how the rules impact buy-side notably
around resources, in-house experience
and operational ramifications. Ensuring
technology is fit for purpose was also
identified as an additional priority by
the paper, as was addressing the lack of
straight-through processing around legal
documentation.
Some custodians and technology firms
have made efforts to improve collateral
management capabilities for firms.
Both BNY Mellon and Northern Trust
have launched an outsourced collateral
management solution, as well as a
collateral selection optimisation service.
Meanwhile, technology vendors such as
OpenGamma and Cassini offer tools for
buy-side firms to evaluate the collateral
costs between cleared and non-cleared
derivatives, and enable them to strategise
their collateral exposures.
However, the paper said while these
initiatives are helping the industry
achieve a greater level of collateral
management automation, firms will have
to ensure their systems are ready to deal
with a range of challenges.
“An increased demand for high-
quality liquid assets, greater market
fragmentation and regulatory burdens
will all crank up the pressure on fractured
processes, inflexible systems and a lack
of cohesions through the value chain,” the
paper noted.